VENTURE CAPITAL

Presented by:
Prof.B.Manchanda
 Meaning
 Venture capital means funds made available
for startup firms and small businesses with
exceptional growth potential.

 Venture capital is money provided by

professionals who alongside management invest
in young, rapidly growing companies that have
the potential to develop into significant economic
contributors.
Venture Capitalists generally:

 Finance new and rapidly growing companies

 Purchase equity securities

 Assist in the development of new products or

services

 Add value to the company through active

participation.
The SEBI has defined Venture Capital
Fund in its Regulation 1996 as ‘a fund
established in the form of a company or
trust which raises money through loans,
donations, issue of securities or units as
the case may be and makes or proposes
to make investments in accordance with
the regulations’.
 Characteristics
 Long time horizon

 Lack of liquidity

 High risk

 Equity participation

 Participation in management
 Advantages
 It injects long term equity finance which provides
a solid capital base for future growth.

 The venture capitalist is a business partner,

sharing both the risks and rewards. Venture
capitalists are rewarded by business success and
the capital gain.

 The venture capitalist is able to provide practical

advice and assistance to the company based on
past experience with other companies which were
in similar situations.
 Advantages (Cont.)
 The venture capitalist also has a network of contacts
in many areas that can add value to the company.

 The venture capitalist may be capable of providing

additional rounds of funding should it be required to
finance growth.

 Venture capitalists are experienced in the process of

preparing a company for an initial public offering
(IPO) of its shares onto the stock exchanges or
overseas stock exchange such as NASDAQ.
They can also facilitate a trade sale.
 Stages of financing
1. Seed Money:
Low level financing needed to prove a new idea.
2. Start-up:
Early stage firms that need funding for expenses
associated with marketing and product
development.
3. First-Round:
Early sales and manufacturing funds.
4. Second-Round:
Working capital for early stage companies that
are selling product, but not yet turning a profit .
5. Third-Round:
Also called Mezzanine financing, this is
expansion money for a newly profitable
company
6. Fourth-Round:
Also called bridge financing, it is intended
to finance the "going public" process
 Risk in each stage
Financial Period (Funds Risk Activity to be
Stage locked in Perception financed
years)
For supporting
Seed Money 7-10 Extreme a concept or
idea or R&D for
product
development
Initializing
Start Up 5-9 Very High operations or
developing
prototypes
Start
First Stage 3-7 High commercials
production and
marketing
 Financial Period (Funds Risk Activity to be
Stage locked in Perception financed
years)
Expand market
Second Stage 3-5 Sufficiently high and growing
working capital
need

Market
expansion,
Third Stage 1-3 Medium acquisition &
product
development
for profit
making
company
Fourth Stage 1-3 Low Facilitating
public issue
VC investment process
Deal origination

Screening

Due diligence
(Evaluation)

Deal structuring

Post investment
activity

Exit plan
Methods of Venture Financing
The financing pattern of the deal is the
most important element. Following are the
various methods of venture financing:
 Equity
 Conditional loan
 Income note
 Participating debentures
 Quasi equity
 Exit route
 Initial public offer(IPOs)
 Trade sale
 Promoter buy back
 Acquisition by another company
DEVELPOMENT OF
VENTURE CAPITAL
IN INDIA
 The concept of venture capital was formally
introduced in India in 1987 by IDBI.

 The government levied a 5 per cent cess on all

know-how import payments to create the venture
fund.

 ICICI started VC activity in the same year

 Later on ICICI floated a separate VC

company - TDICI
 Venture capital funds in India
VCFs in India can be categorized into
following five groups:

1) Those promoted by the Central

Government controlled development
finance institutions. For example:
- ICICI Venture Funds Ltd.
- IFCI Venture Capital Funds Ltd (IVCF)
- SIDBI Venture Capital Ltd (SVCL)
2) Those promoted by State Government
controlled development finance
institutions.
For example:
- Punjab Infotech Venture Fund
- Gujarat Venture Finance Ltd (GVFL)
- Kerala Venture Capital Fund Pvt Ltd.

3) Those promoted by public banks.

For example:
- Canbank Venture Capital Fund
- SBI Capital Market Ltd
4)Those promoted by private sector
companies.
For example:
- IL&FS Trust Company Ltd
- Infinity Venture India Fund

5)Those established as an overseas venture capital

fund.
For example:
- Walden International Investment Group
- HSBC Private Equity
management Mauritius Ltd
 Rules & regulations of VC in
India

 AS PER SEBI
 AS PER INCOME TAX ACT,1961
 Rules by SEBI:
 VCF are regulated by the SEBI (Venture
Capital Fund) Regulations, 1996.
 The following are the various provisions:

 A venture capital fund may be set up by a

company or a trust, after a certificate of
registration is granted by SEBI on an
application made to it. On receipt of the
certificate of registration, it shall be binding
on the venture capital fund to abide by the
provisions of the SEBI Act, 1992.
 Contd…
A VCF may raise money from any
investor, Indian, Non-resident Indian or
foreign, provided the money accepted
from any investor is not less than Rs 5
lakhs. The VCF shall not issue any
document or advertisement inviting offers
from the public for subscription of its
security or units
 Contd…
 SEBI regulations permit investment by
venture capital funds in equity or equity
related instruments of unlisted companies
and also in financially weak and sick
industries whose shares are listed or
unlisted
 Contd…
 At least 80% of the funds should be
invested in venture capital companies and
no other limits are prescribed.

 SEBI Regulations do not provide for any

sectoral restrictions for investment except
investment in companies engaged in
financial services.
 Contd…
A VCF is not permitted to invest in the
equity shares of any company or
institutions providing financial services.

 The securities or units issued by a venture

capital fund shall not be listed on any
recognized stock exchange till the expiry
of 4 years from the date of issuance .
 Contd…
A Scheme of VCF set up as a trust shall be
wound up
(a) when the period of the scheme if any, is
over
(b) If the trustee are of the opinion that the
winding up shall be in the interest of the
investors
(c) 75% of the investors in the scheme pass
a resolution for winding up or,
(d) If SEBI so directs in the interest of the
investors.
As per provision of income-tax
rules:
 The Income Tax Act provides tax
exemptions to the VCFs under Section
10(23FA) subject to compliance with
Income Tax Rules.

 Restrict the investment by VCFs only in

the equity of unlisted companies.

 VCFs are required to hold investment for

a minimum period of 3 years.
 Contd…
 The Income Tax Rule until now provided
that VCF shall invest only upto 40% of the
paid-up capital of VCU and also not
beyond 20% of the corpus of the VCF.

 After amendment VCF shall invest only

upto 25% of the corpus of the venture
capital fund in a single company.

 There are sectoral restrictions under the

Income Tax Guidelines which provide that
a VCF can make investment only in
specified companies.
 Indian Venture Capital and Private
Equity Association (IVCA)
 It was established in 1993 and is based in
Delhi, the capital of India
 It is a member based national organization that
- represents venture capital and private
equity firms
- promotes the industry within India and
throughout the world
- encourages investment in high growth
companies and
- supports entrepreneurial activity and
innovation.
 IVCA members comprise venture capital
firms, institutional investors, banks,
incubators, angel groups, corporate
advisors, accountants, lawyers,
government bodies, academic institutions
and other service providers to the venture
capital and private equity industry.

 Members represent most of the active

venture capital and private equity firms in
India. These firms provide capital for seed
ventures, early stage companies and later
stage expansion.
 How does the Venture Capital
work?
 Venture capital firms typically source the majority
of their funding from large investment
institutions.

 Investment institutions expect very high ROI

 VC’s invest in companies with high potential

where they are able to exit through either an IPO
or a merger/acquisition.

 Their primary ROI comes from capital gains

although they also receive some return through
dividend.
 Venture capital industry wise
segmentation
Percentage
9.03 6.94
IT & ITES
3.36 7.73
Energy
Manufacturing
12.92
11.5 Media & Ent.
BFSI
Shipping & logistics
4.32
Eng. & Const.
11.43
Telecom
Health care
4.82
Others
27.95

Percentage calculated on the total VC investment- 14,234 USB (fig. of 2007)

 Top cities attracting venture
capital investments
CITIES SECTORS

MUMBAI Software services, BPO, Media,

Computer graphics, Animations,
Finance & Banking
BANGALORE All IP led companies, IT & ITES,
Bio-technology

DELHI Software services, ITES , Telecom

CHENNAI IT , Telecom

HYDERABAD IT & ITES, Pharmaceuticals

PUNE Bio-technology, IT , BPO

Critical factors for the success of
venture capital
 The regulatory, tax and legal environment should play an
enabling role as internationally venture funds have evolved
in an atmosphere of structural flexibility, fiscal neutrality
and operational adaptability.
 Resource raising, investment, management and exit should
be as simple and flexible as needed and driven by global
trends.
 Venture capital should become an institutionalized industry
that protects investors and investee firms, operating in an
environment suitable for raising the large amounts of risk
capital needed and for spurring innovation through start-up
firms in a wide range of high growth areas.
 In view of increasing global integration and mobility of
capital it is important that Indian venture capital
funds as well as venture finance enterprises are able
to have global exposure and investment opportunities

 Infrastructure in the form of incubators and R&D need

to be promoted using government support and private
management as has successfully been done by
countries such as the US, Israel and Taiwan. This is
necessary for faster conversion of R&D and
technological innovation into commercial products.
 Growth of VC/PE in India
16000 450

14234
14000 400
387

350
12000

299 300
10000 280

250
8000 7500

6390
200

6000 170
146 150

4000 110
100
78 71
2200
56 1650
2000 50
1160 937
591 470
0 0
2000 2001 2002 2003 2004 2005 2006 2007 1st half of
2008
Value of deals No of deals
 Impact of recession on the VC
industry in India
 The down market virtually closed the IPO market
for emerging companies.

 With less opportunities for getting ROI investors

tend to scale back, adjust their investment focus
and/or get more picky in funding companies.

 The investors that put money into their funds

became less aggressive during recession so it
was harder for the VCs to raise money.
 VC/PE funds to take 2 years to regain vigour
 Venture capital (VC) and private equity (PE)
funds are likely to take up to two years to regain
their 2005-07 level.
 With India’s economy bouncing back and the
country on track to achieve an 9 % GDP growth,
interest in the Indian market is re-emerging.
 The VC/PE fund inflow into the country in the last
five and half years has been to the tune of over
$44.8 billion with investments flowing into around
13,000 domestic companies.
 The market regulator, SEBI, has to start looking
at a different regulatory framework for this kind
of capital, which is essentially risk capital
IMPACT OF UNION Budget 2010
 The increase in weighted deduction of in
house R&D will boost up investment in
health care.

 46% of the total investment is going to

infrastructure development which is a
positive sign for investors.
Future prospects of VC in India
 VC can help in the rehabilitation of sick units.
 VC can assist small ancillary units to upgrade
their technologies
 VCFs can play a significant role in developing
countries in the service sector including
tourism, publishing, health care etc.
 They can provide financial assistance to
people coming out of universities, technical
institutes, etc thus promoting entrepreneurial
spirits
ICICI VENTURE CAPITAL
Deal sourcing

Deal evaluation

Investment
decision

Post-investment
process

Exit strategy
ICICI VENTURE CAPITAL
 By sectors
o Banking & financial services
o Customer services
o Energy
o Engineering
o Hospitality
o Internet
o IT/ITES
o Logistics
o Manufacturing
o Retail
o Textiles
Prof. B.Manchanda